Friday, Nov 30
By Mugunthan Kesavan
NEW DELHI – Gold prices have fallen by about 6% since the start of 2018 because of a strong dollar and a bull run in US equities, but fundamentals are changing and the outlook for the precious metal is “very interestingly balanced” for 2019, World Gold Council Chief Market Strategist and Head of Research John Reade said.
Gold prices that were at $1,340 per ounce on COMEX at the beginning of the year, slipped below $1,200 in August before recovering a little to around $1,225 per ounce as of now.
The US S&P 500 Index has risen 2.4% on year so far in 2018, blunting investor interest in gold, while the US dollar index is up 8.7% since January.
Global demand for gold fell nearly 4% on year to 2,935.9 tn in Jul-Sep, according to data from the World Gold Council.
Dollar strength may not sustain next year and that should be positive for gold, Reade told Cogencis in an interview.
Though a strong dollar, largely the result of the escalation in trade dispute between the US and China, has weighed on gold prices, it has also prompted many central banks across the world to increase their gold holdings.
“They are all wondering whether they want to own the assets (like dollar) which the US government has proved willing to use in a trade or geo-political argument. It is the same factor that is driving some central banks to increase their gold holdings,” Reade said.
Following are edited excerpts of an interview with Reade:
Q. Gold price and demand has been muted this year overall. What are the reasons behind it?
A. The underwhelming performance of gold market is related to the tax bill that was passed by the US government which cut taxes and buoyed economic growth in the short term. The tax bill allowed local companies that held profits offshore to bring them back into the US. So these two factors were behind the short-term strong economic growth. Dollar inflows into the US helped the greenback this year. However, these two factors are unlikely to continue for a very long time.
Q. What is your outlook on gold for 2019?
A. I think we are at a critical juncture at the moment. We have had two months of weakness in the US equity markets and the volatility remained at elevated levels. So far this has not translated into economic weakness, but if this financial market turbulence continues, it is very likely to affect the US economy. If we see volatility continuing into 2019 that will make investors concerned about their equity and bond holdings. So I think this volatility continuing will be a positive factor for gold markets next year. We are not in the forecasting business, but I think at the moment it is a very interestingly balanced outlook for gold.
Q. Many analysts now say that the US Federal Reserve may go slow on interest rate hikes. Do you see that helping gold prices?
A. I think that the US Federal Reserve is the only major central bank that has been raising interest rates. This has been one of the factors behind the strength in the US dollar. If the Fed is going to slow down its interest rate hikes, it would send an important signal about the strength of the US economy and that would have an impact on the valuation of dollar; maybe not immediately but it would strengthen the argument that 2019 may not see a repeat of the US dollar strength.
Q. A major trend that gold market has seen this year is outflows in ETFs. Do you see that trend continuing next year?
A. Between June and September we saw gold prices going down quite a lot. I think that triggered the outflows in ETFs. Now that prices seem to have stabilized above $1,200 an ounce, outflows have generally stopped. Not only that, there have been some inflows as well. Unless gold prices fall
further and resume their downward trend, there is little risk of major ETF outflows.
Q. Global tensions generally push up gold prices. Why were gold prices weak this year despite the trade tensions developing between US and China?
A. It is interesting. Trade tensions have led to strength in the US dollar, so gold prices did not move up. So far these trade tensions have been literally that – fears and worries. They haven’t translated yet into a big reaction from the economy. Gold is a hedge against economic weakness. Whenever gold has shown a sustained increase, it has been not due to geopolitical tensions but due to actual economic turbulence. And we have not seen too many signs of that so far.
Q. There has been a spurt in gold demand from various central banks this year. What is driving them towards gold?
A. What happened in Iran is one of the factors that is driving central banks to increase their gold holdings. The sanctions that the US government is using against Iran include the use of the dollar and the payment system called SWIFT. So it is not just about trade, it also restricts Iran’s ability to operate in financial markets. The interesting thing about the Iranian sanctions is it is one of the factors that is making some central banks look at their US dollar holdings. Not that they are worried about immediate sanctions, but they are all wondering whether they want to own the assets which the US government has proved willing to use in a trade or geo-political argument. It is the same factor that is driving some central banks to increase their gold holdings. The US’ willingness to use sanctions has persuaded other countries to take a re-look at their foreign exchange. There are number of things happening with the US dollar. One of which is that its long term position as the single reserve currency of the world is currently coming under threat. So these two factors may be playing a role in the central banks increasing their gold holdings.
Q. Given the large size of short positions on gold on COMEX, do you see the risk of a short squeeze? Do you think the size of the short positions is justifiable?
A. When I am thinking about which direction gold can go forward when there are significant short position in the market, you have to recognize the risk for a potential quick move higher should speculators cover their positions, and there already has been some of that. One needs to get through certain important technical levels of the price for a short squeeze and typically the 200-day-moving-average is usually the big one. If there has to be squeeze, it will start slowly as the price moves higher and when it hits certain important technical level it will then go up quickly. Outlook for gold is very finely balanced. End
US$1 = 69.6875 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Rashmi Sanyal
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